Massachusetts: Tech tax repealed

On September 27, 2013, Massachusetts Governor Deval Patrick signed legislation (H. 3662) that repealed the so-called “tech tax” or sales tax on computer software services. The tech tax was vehemently opposed by the industry, as have other attempts to expand the sales tax base to services in other states. However, most other sales taxes on services generally did not become effective – the industry’s persistence and arguments in opposition were no doubt the primary driver of this repeal.

Of note is that this repeal is retroactive, as the tech tax law went into effect as of July 31, 2013. Unfortunately, companies that have already made efforts to comply with the law will have some additional work to complete and “undo” their compliance efforts.

For instance, if your company has collected the tax and has not remitted the taxes to the state, you are required under the new repeal legislation to make “reasonable efforts” to return the tax to those customers from whom you collected the tech tax. In addition to making reasonable efforts to return the tech taxes collected, if your company filed a return but did not remit the tax collected, your company must electronically file abatement applications no later than December 31, 2013 in order to eliminate the self-assessment of the tax. If your company remitted collected tech taxes to the state and filed a return, your company must electronically file abatement applications no later than December 31, 2013; your company must also provide a refund to all persons from whom you collected the tech tax within 30 days of receiving the abatement.

In the event your company was required to collect the tech tax but did not do so, you are not subject to fines, penalties or fees. Note that this exemption only applies to the tech tax that became effective July 31, 2013 and not to any other form of taxes, including other Massachusetts sales taxes.

If your company would like to discuss what is required given your circumstances, please contact us.

New York: Advisory opinion clarifies application of sales and use tax to software tool

A software developer (Petitioner) requested an advisory opinion (TSB-13(30)S) from the New York Department of Taxation and Finance (Department) about whether his online software assessment tool or the reports generated by the use of his software tool are subject to New York sales and use taxes.

Online software assessment tool

The software developer uses his online software assessment tool to evaluate interview responses from employer-customers regarding workplace support of employee health (its policies, services, facilities, etc.) and generates a report using the software tool that he sells to the employer-customer. The software developer also will sell single-use or multiple-use licenses to use the software tool and to access the online interview to third-party consultants, who will then use that software tool and interview responses to generate a report that the consultant will sell to the employer-customer.

Sales of licenses to third-party consultants subject to sales tax, not eligible for resale exemption

The Department determined that the Petitioner’s sale of the license to use the online software assessment tool to third-party consultants constitutes receipts from the sale of prewritten computer software. Such prewritten computer software falls within the definition of tangible personal property subject to sales tax “regardless of the medium by means of which such software is conveyed to the purchaser.” (citing Tax Law §1001(b)(6)).

The definition of “sale” includes any licenses to use software. Such license sales are taxable at the place where the tangible personal property is delivered or at the point at which the possession is transferred. For purposes of a “license to use” the transfer of possession has occurred if there has been a transfer of “the right to use, or control, or direct the use of tangible personal property.” (citing Regulation §526.7(e)(4)).

Consequently, the Department determined that the “Petitioner must collect tax on the sale of licenses to use his software tool where access to the software will occur in New York. Because the third-party consultants are not re-selling licenses to use Petitioner’s software tool, the consultants should not offer and Petitioner may not accept a resale certificate for those purchases.”

Petitioner’s use of the online software assessment tool subject to use tax

The Department also explained that use tax applies to computer software that is written or created by the user if during the regular course of business the user offers similar software for sale (including as a component part of other property being sold). Therefore, the Department determined that Petitioner’s own use of the software tool is subject to use tax because he sells it to third-party consultants. The use tax is calculated based on the consideration paid for tangible media, such as discs or tapes, used in conjunction with the software. Because the Petitioner makes the software tool available online instead of reducing it to tangible media, the base tax on which the use tax would be calculated is zero.

Sale of report not subject to sales tax

The Department explained that New York tax law also imposes tax on the sale of certain information services, unless such information services are personal or individual in nature. The Department determined that the Petitioner’s sale of the report to an employer-customer constitutes an information service that is personal or individual in nature because the information in the report relates to the individual employer-customer’s own data, and per the contact with such employer-customer, the Petitioner is not permitted to provide such report to anyone else. The Department stated that the fact that Petitioner may, with permission from the employer-customers, use the aggregated data for research purposes does not alter its conclusion that such reports are not subject to sales tax.

Connecticut: Amnesty program currently in effect, ends soon

Connecticut recently kicked off its tax amnesty program. However, the Connecticut Tax Amnesty Program (the Program) is short-lived and only available through November 15, 2013. The Program allows taxpayers to pay back taxes to the state while having interest owed reduced by 75 percent, as well as the avoidance of penalties and criminal prosecution. In addition, amnesty is open to individuals and businesses alike who owe Connecticut taxes for any period ending on or before November 30, 2012.

The Program is open to individuals and businesses currently under audit.

While amnesty programs can be beneficial to most businesses and individuals, there are consequences and risks involved in using any amnesty program. It is also important to evaluate whether the taxes you owe qualify for the program, among other important considerations. As such, McDonald Hopkins strongly urges taxpayers to seek professional advice before filing an application or communicating with the Connecticut Department of Revenue Services.

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.